Market Plus: Sue Martin (December 1, 2017)

Podcast

Pearson: This is the Friday, December 1, 2017 version of the Market Plus segment. Joining us now is Sue Martin. Sue, welcome back.

Martin: Thank you.

Pearson: Sue, we did not get a chance, it's hard to believe it's the first day of December already.

Martin: I know.

Pearson: We did not get a chance to discuss cotton on the program. So cotton, a nice little rally this week, $1.38 to the upside. What does that tell you? Are we going to steam higher here through the end of the year?

Martin: Well I think we will. I don't think cotton is loaded long with the funds as like what you have in corn and wheat. But the thing that I do like about cotton is the longer term picture looks good. Acres on cotton are expected to come down 1.2 million acres in 2018. And the Chinese demand seems to be growing for cotton. So I think cotton has got promise. Now I will say it's one of the markets this year that has had a bullish move and has hung onto it thus far. So I would tend to say as a producer you might want to take, because our supplies are still pretty decent, you might want to buy some puts under it and floor it and let it go and see how much you can get out of this. We had hurricane, I can't remember which one it was --

Pearson: Harvey was in Texas and Irma was in Georgia.

Martin: Yes. And so that hit cotton producers too. So I guess I would have to say buy some puts, floor it.

Pearson: Would you be buying front month puts and then roll them if the rally keeps going? Or would you be looking out a little ways --

Martin: I'd probably look out and I'd probably be looking at May or July, probably July.

Pearson: Okay. Now, we do have a lot of questions as I mentioned earlier during the program. We've got one here from, frankly he's one of the best farmers in Western Iowa, Frank Jones in Cumberland, Iowa and Frank says, it's looking like sooner or later there is going to be some kind of military conflict with North Korea. If so, how do the grain and livestock markets react? If we get a shooting war what happens?

Martin: I think if we get a shooting war, first off, our war is going to be totally different than what we've had in the past. We'll probably go in and wipe him out and there will be a crater. I don't know. But you can't reason with crazy and the fact that they've had a defector here recently I think spoke volumes for them. I think that when you look at it I think that won't hurt our grain markets.

Pearson: They're not buyers of them today.

Martin: Well no, and the thing is our prices are so dirt cheap so what direction do you think they've got to go? I think when you look at corn you’re looking at a market that has got maybe pennies on the downside as opposed to quarters on the upside. I am very positive corn and I'm positive wheat too but I really like corn a lot, in fact I like corn better than I like beans. Beans will be good. But I think as a whole it will be taking and sending food over to South Korea and the area over there. Usually war is very price positive to meat and to grains and so I tend to think it won't hurt us at all.

Pearson: Okay. Now you mentioned you're more bullish corn than you are beans but you also were a little bullish on the wheat side. We've got a question here from Louise in Kansas on Twitter @vlehmke. Louise wants to know, what are the odds of wheat going up a buck a bushel between now and harvest, winter wheat?

Martin: I would not underestimate that at all. One thing that both wheat and corn have is that, and commodities in general, have record open interest. We have been growing open interest, at the same time in commodities on the Commodity Research Bureau Index, at the same time and prices for most commodities is dirt low and we have record highs being made on the S&P. Okay. And if you look at a 20 year channel of price overlay you're treading along the channel line on the bottom side as opposed to this S&P on the top side. Okay. That said, when you look at this open interest, record open interest for corn even and for wheat, but your volatility is record low in the options, that is usually an environment that you don't sell into, that is an environment that is just about to click away. And that relationship has kind of been there for maybe at least two months I want to say, so we're probably about on the cusp of this market starting to move out of here.

Pearson: Okay, we just need some positive news to drive those sellers out.

Martin: Well we all know the negatives, we all know the negatives so I think what's going to happen is we're going to start, here's the thing, okay everybody is worried about NAFTA and President Trump leaving NAFTA. We've had our fifth negotiations --

Pearson: Round of negotiations.

Martin: And there's a sixth one at the end of January. Maybe I'm the eternal optimist but I think you've got to put your faith in President Trump and I've read all the negative rhetoric from trade groups and what have you. But he is a trade negotiator. That has been his expertise through his business career. And what is to say that all of a sudden maybe he comes out with a big policy. Remember in 1983 we had way bigger carryouts than we have now and all of a sudden the government gave us a PIC program and they also let us auction in or bid in how much we weren't going to put into production. Well I don't expect that. But what I expect is maybe he starts offering a little more grain to countries when they do buy and it's a currency exchange situation and all of a sudden you start seeing grain going out the door. I just think something is going to happen and I look at the relationships of the technical side, there's just no way, you might come down and I thought we could maybe get corn down to $3.27, now if we get Dec off the board and the March is there I don't think that happens. I think then we're moving back on higher and working our way. Is it going to be a runaway thing? Not until you get something going. But, Mike, there is a continuous chart, a daily continuous chart gap that goes from $5.48 and three quarters to $7.01. It was made in 2013. That gap is getting to be an old gap but that is, it's the only gap on the upside not filled and it is a humongous one. You get these funds, you get a reason and you start smoking them, these funds are going to lay into corn like no other and you'll see these, you've got a huge short position, they've got to get out of that and then start going long.

Pearson: But once they start getting out of that, that's going to turn the trend back upwards, which will just trigger more buying.

Martin: Exactly. Exactly. Things will change. We've been here before and while everybody is feeling pretty down in the mouth because they had two years where they hung onto crops and hung on a little too long I do want to warn them, a year of an 8, 7 out of 10 of them, for example on soybeans, but corn kind of too, sees the low for the year off of the high of the year made in November or December. So they might want to keep that in mind. And when does the highs come? Well, if you look at the last two years we've had highs in July and we've had our lows on August 31st for the corn. What are the odds of that happening again? Never say never in this business but I find that in a year of an 8 your highs tend to come a little earlier. June would be your latest. Yeah in 2008 you put your high in on July 5th but basically June will be your latest. I think we need to watch the month of May this year.

Pearson: Okay. Now Sue we've got two questions here, rapid fire. Is spring wheat going to take back acres from corn in the Dakotas and Western Minnesota?

Martin: I think it will.

Pearson: Okay. Even with that setup you just described potentially in the corn market?

Martin: Yes I think it will because I also think wheat is going to come along with it too. Wheat has the same setup with record open interest, very low volatility and then of course prices hovering on that channel line. And there's an advisory service out there, I don't know if I should plug, but it's Hackett Advisory has charts on this type of thing and if a person is looking to just get a whole different spin on things take a look at that.

Pearson: Alright. Next question from John in Missouri @jhansman on Twitter. Will Milo offer better opportunities than corn over the next couple of years or will it just hang tight with these burdensome corn stocks?

Martin: I think it will hang along with it. One thing I thought was interesting was is in China we have seen China come into the market and they have bought, well it's talked about at first it was 10 to 12 cargoes, now it sounds like they bought another three or four this week --

Pearson: Of milo.

Martin: This was of corn. But now they have also had a sale of sorghum as well. And Chinese corn prices are really hitting highs. They're the highest since what, September 27th I think. So it's pushing and the demand is huge for corn and they're concerned about the quality of the old crop, go figure. But they're also looking at expanding aggressively into ethanol and by 2020 they're looking at a huge increase in needing to import corn. Well that's only two years away, that will be here before we know it. And then you've got Brazil and Brazil is looking at the lower Congress approved a new program called Renovabio and it is to expand ethanol and biofuels for usage for blending. And now granted, there is a datapro, datagro, something like that, it's a consultancy of sugar and biofuels and ethanol down in Brazil and they're talking that this could lead to where the need or usage for biofuels runs up to about 40 billion liters a year by 2030. That's 12 years away. But that compares to last year of a usage of 26 billion liters.

Pearson: So almost doubling.

Martin: So that saying, that could take less corn out of the picture. It might also give them a little DDGs too. But what that's saying is it's changing the complexion. And so I think we need to kind of keep that in mind as to what's happening here.

Pearson: So even though the ethanol boom in this country has cooled we could see something similar develop in China and perhaps redevelop in Brazil.

Martin: Right. And that company is called Datagro. And now this still has to be approved by the Senate but it's looking kind of interesting. And everybody is looking at ways to use these supplies.

Pearson: Right, when stuff is cheap people want to find ways to use them.

Martin: And economies are growing.

Pearson: You bet. And our final question from Glen in Bryan, Ohio, I think you've done a great job of answering. He wanted to know, what is the best option strategy for corn and bean producers to minimize risk? You mentioned buying puts.

Martin: Put spreads.

Pearson: Put spreads, this is the year.

Martin: Yes, I would buy the put spreads and I'd probably go to July, like for corn for example, and I would buy probably the $3.80 put and I would sell maybe a $3.50 or a $3.40, maybe a $3.40 put, cheapen it up a little bit but the thing is as the market starts to move higher basically your risk is minimal, you aren't going to have a lot of risk on the table, you're holding your cash so as the market moves higher you should be fine. Now the one thing I will say is that as basis is where your bite is coming from this year because we do have supplies albeit I'm hearing from some of these co-ops that they didn't take in near the corn this fall that they have versus a year ago. So I think that speaks to our issue. And then you look at Iowa, 26% short to very short subsoil. A lot can change between now and spring but there's a lot of variables on the table and we're dirt cheap.

Pearson: Right. Well, Sue Martin, thank you so much for taking the time to join us this week, always appreciate your insights.

Martin: Thank you.

Pearson: Folks, now is the time of year to write Santa your wish list and on ours is to include you in our Market to Market Classroom project. So we are looking for current students to submit their big picture commodity questions and then have them answered right here in Market Plus. You can join in our reindeer games and send us your questions in video form, just send us a message on Twitter or send an email to markettomarket@iptv.org for details. So Sue, once again, thank you so much for taking the time.

Martin: Thank you.

Pearson: And folks, join us again next week when we'll examine pricing information gaps plaguing some livestock producers and John Roach will sit across from me at the Market to Market table. Until then, thanks for watching or listening. I'm Mike Pearson. Have a great week.

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